By Ahmed Rasheed

BAGHDAD, May 2 (Reuters) - Iraq's parliament could still pass a draft oil law within weeks, but a dispute between the central government and Kurdish officials has worsened a foreign investment climate already damaged by spiralling violence.

Iraq's central government and autonomous, oil-rich Kurdistan are at loggerheads over legislation that will decide control of the world's third largest oil reserves.

The two sides will meet as early as the weekend to try to reach an agreement Washington says is key towards reconciling Iraq's warring sects and ethnic groups.

But analysts and Western oil officials said that even if parliament rubber-stamps the law, a perceived lack of legal clarity and poor security on the ground means it will take years for Iraq to develop an environment conducive to business.

An oil law is vital to securing foreign investment to boost Iraq's oil output, stuck at around 2 million barrels a day, and rebuild its shattered economy.

"Lack of security is already keeping out the international oil companies and the added public objections to the oil law will make the situation even worse," said Muhammed-Ali Zainy from the London-based Centre for Global Energy Studies.

"Who would dare come to Iraq to develop and explore when they know there is widespread resentment towards them, the oil law and the constitution?"

A senior Western oil executive said major oil companies will not jump to invest in Iraq until they see a stable government, security on the ground and legislative clarity.

"We're not going to drill and produce oil for Iraq when we aren't sure of how it will get sold," he said. "We won't sign at any price -- not with billions of dollars at stake."

For political reasons, however, companies from China, Russia and India might be willing to sign oilfield contracts, he said.

DEADLINE

Deputy Prime Minister Barham Salih, chief architect of the landmark draft oil law, said he hoped Baghdad and the Kurdish regional government will reach a compromise when they meet after an international conference on Iraq in Egypt on May 3-4.

"There are some points of contention regarding the appendixes and the oil revenues management law. I think that all players should be patient but determined to resolve these problems," he told Reuters on Tuesday.

"We have a deadline. I think all the key leaders recognise we need to solve this problem."

The draft, passed by the cabinet in February and hailed at the time by Prime Minister Nuri al-Maliki as a pillar of Iraqi unity, did not formalise divisive issues such as how revenues would be shared and who would control discovered but undeveloped oilfields -- the federal or regional governments.

Those details were to be clarified in the annexes.

Most of Iraq's proven oil reserves are in the Shi'ite south and in the Kurdish north.

Ashti Hawrami, minister of natural resources in Kurdistan, has said annexes in the oil law are unconstitutional because they would wrest oilfields from regional governments and place them under a new state oil company.

Kurdish officials, who have warned they will try to block the draft law in parliament, have signed deals with foreign oil companies -- including production-sharing agreements -- despite widespread criticism from Shi'ite and Sunni Arab nationalists.

Last week, the ministry of oil in Baghdad warned regions against signing contracts until the law was passed.

Mustafa Alani, from the Gulf Research Center in Dubai, said even if parliament approves the law the dispute has raised serious questions over its implementation and fanned fears it could tear the country apart.

"The oil law is seen by many Iraqis as dangerous. It's been controversial from the beginning," Alani said. "To survive, it must be regarded as legitimate and there must be security on the ground."

Another Western oil company source said Baghdad has a long way to go when it comes to opening up the country's oilfields.

"I see an oil crawl, rather than an oil rush," he said.

(Additional reporting by Sherko Raouf in Sulaimaniya, Shamal Aqrawi in Arbil and Peg Mackey in London)

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